These Stocks Can't Fall

It's a multinational company and owns a strong brand name. When consumers have less money, they buy more of this company's product. It's a recession-proof business.

Best of all, the stock price has fallen more than 50% in the last nine months, hammered by economic worries... In other words, it's cheap.

I plan to recommend this stock in The 12% Letter, my newsletter. My only problem: The stock price is still falling. If I tell my readers to buy shares, we'll be stepping in front of a steamroller. So we won't buy this stock until it demonstrates it can't fall any farther.

How will I know it can't fall?

That's easy. When bad news doesn't hurt the stock price, I'll know it has hit rock bottom... and we'll buy.

I'll also compare the stock to the overall market. When the overall stock market is falling, what does my stock do? Does it fall faster? Does it sit still? Or does it rise? If my stock goes up while the S&P falls, it's time to buy.

I call this "acting well." Think of it like tolerance to a drug. There's a point when bad news and a bear market lose their power to push a stock price down any more. That's when I buy, because I know no matter what the world throws at this stock, it is not going to get any cheaper.

On the other hand, if news gets better, you can expect the stock price to fly, as all the short sellers panic and dump their positions.

Here's an example:

Sentiment against the homebuilder sector is the worst in history... As I wrote in my January 14 column, homebuilder shares are trading at a discount to the most draconian scenario imaginable. And now they're acting well, too...

This year has been terrible for the stock market. It's the worst atmosphere for stocks I've seen since mid 2002. Markets around the world have collapsed. Japan is down 14.5% since January 1. China is down 14%. Germany is down 16%. The UK's stock market is down 11%.

Here in the U.S., the climate is just as bad. The Dow Jones has fallen 10%. The S&P 500 is down 8%. And the Nasdaq 100 is off 14%.

The panic got so bad, the Fed jumped into the market on Tuesday with a surprise 75-point interest rate cut.

Check out the chart below. It shows how homebuilding stocks have performed versus general stocks over the last two weeks.

The Homebuilder ETF (ITB) is up 13% since January 9. The S&P 500 is down 6% over the same period.

And homebuilder stocks have gone up in the face of bad news, too... Last week, the Commerce Department announced the largest annual decline in new homebuilding in 27 years. In 2007, they said, builders started construction on 1.3 million new homes. That was down 25% from 2006. This was a much bigger decline than economists had expected.
 
The same day, ITB went up 1.2%.

Finding great investments is easy. Knowing when to buy them is hard. Homebuilders have been cheap for months... but you would have lost your shirt if you'd bought them last year. Steve and I fell into this trap. We were too early. We bought before we had confirmation that homebuilders could not fall any lower, before the stocks had started acting well.

Now homebuilder stocks are going up... even as terrible news comes out and even as the general stock market crashes. Homebuilder stocks are cheap... hated... and now they're acting well. It's time to buy.

Good investing,